What employer payroll taxes are and why you calculate them
Employer payroll taxes are the taxes your business owes based on what you pay your employees. They are separate from the taxes you withhold from employee paychecks. You owe them whether or not you withhold anything from your workers — they are your direct obligation as an employer.
The main employer taxes are Social Security (6.2% of wages), Medicare (1.45% of wages), and federal unemployment insurance or FUTA (0.6% of wages, though this varies by state and history). Most states also charge state unemployment insurance or SUTA. You calculate each one independently, then pay them on a schedule set by the IRS or your state.
The reason you calculate them yourself is that the IRS does not tell you the amount — you determine it from your payroll records, then report and pay it. Getting the math wrong can result in penalties, interest, and audit risk. Getting it right means you know your actual labor costs and stay compliant.
Key Takeaways
- Employer Social Security tax is 6.2% of each employee's gross wages up to an annual wage cap (currently $168,600 for 2024, though this changes yearly).
- Employer Medicare tax is 1.45% of all gross wages with no cap, plus an additional 0.9% Medicare tax on wages over $200,000 per employee per year.
- Federal unemployment tax (FUTA) is 0.6% of the first $7,000 of each employee's annual wages, but you may owe less if you pay state unemployment tax on time.
- State unemployment tax (SUTA) rates and wage bases vary by state and by your industry's history of claims, and you must calculate and pay it separately from federal tax.
- You calculate these taxes after each pay period using gross wages, then reconcile and pay them monthly, quarterly, or annually depending on IRS rules and state rules.
How to calculate Social Security and Medicare taxes
Start with gross wages — the total amount you pay an employee before any deductions. Do not subtract health insurance, retirement contributions, or income tax withholding. Social Security and Medicare are calculated on the full gross amount.
For Social Security, multiply each employee's gross wages by 6.2%, but only up to the annual wage cap. In 2024, the cap is $168,600 per employee per year. Once an employee reaches that cap in a calendar year, you stop calculating Social Security tax on their additional wages for the rest of that year. For example, if an employee earns $180,000 in 2024, you calculate 6.2% on only $168,600, not the full $180,000.
For Medicare, multiply each employee's gross wages by 1.45%. There is no wage cap — you calculate Medicare on all wages, no matter how high. Then, if an employee's wages exceed $200,000 in a calendar year, you also owe an additional 0.9% Medicare tax on the amount over $200,000. This additional tax applies per employee, not per employer, so a single high-earning employee triggers it, not the total payroll.
Add the Social Security and Medicare amounts together for each employee each pay period. This is your employer contribution for that period.
How to calculate federal unemployment tax (FUTA)
FUTA is the federal unemployment insurance tax. The standard rate is 0.6% of the first $7,000 of each employee's annual wages. Once an employee reaches $7,000 in wages in a calendar year, you stop calculating FUTA on their additional wages for the rest of that year.
The calculation is straightforward: take each employee's gross wages up to $7,000 per year, multiply by 0.6%. If an employee earns $10,000 in a year, you calculate 0.6% on only $7,000.
However, if you pay your state unemployment tax (SUTA) on time and in full, you may receive a credit that reduces your FUTA rate. Most employers end up paying 0.6%, but some pay less if they are in a state with a strong unemployment trust fund or if they have a low claims history. Check with your state labor department or your payroll software to confirm your actual rate.
How to calculate state unemployment tax (SUTA)
SUTA rates and wage bases vary significantly by state. Some states use a 0.6% rate; others use 2%, 3%, or higher. The wage base — the maximum wages subject to SUTA per employee per year — also differs. Some states cap it at $7,000 (matching the federal FUTA base); others use $9,000, $10,000, or higher.
Your SUTA rate depends on your industry and your employer account history. New employers typically start at a standard rate set by the state. Over time, if your employees file few unemployment claims, your rate may decrease. If claims are frequent, your rate may increase. This is called experience rating or merit rating.
To calculate SUTA, multiply each employee's gross wages (up to your state's wage base) by your state's assigned rate. For example, if your state rate is 2.5% and the wage base is $9,000, and an employee earns $12,000 in a year, you calculate 2.5% on $9,000 only. Contact your state labor department or check your SUTA account online to confirm your rate and wage base for the current year.
Putting it together: a worked example
Assume you have one employee earning $5,000 in gross wages in a single pay period. Assume your state SUTA rate is 2.0% with a $9,000 annual wage base, and this is the employee's first pay period of the year.
| Tax | Calculation | Amount |
|---|---|---|
| Social Security (6.2%) | $5,000 × 0.062 | $310.00 |
| Medicare (1.45%) | $5,000 × 0.0145 | $72.50 |
| FUTA (0.6%) | $5,000 × 0.006 | $30.00 |
| SUTA (2.0%) | $5,000 × 0.020 | $100.00 |
| Total employer payroll tax | $512.50 |
This $512.50 is your employer tax liability for this pay period for this employee. If you have multiple employees, repeat the calculation for each one and sum the results. You then report and pay this amount according to IRS and state schedules — usually monthly or quarterly, depending on the size of your payroll.
When and how to pay employer payroll taxes
The IRS uses a deposit schedule based on how much payroll tax you owe. Most small employers are on a monthly schedule: you deposit taxes by the 15th of the following month. Larger employers may be on a semi-weekly schedule: you deposit twice a week based on when you pay employees.
You deposit federal taxes (Social Security, Medicare, and FUTA) through the Electronic Federal Tax Payment System (EFTPS) or through your bank if it offers payroll tax payment. You cannot pay by check or cash to the IRS directly.
State unemployment taxes (SUTA) are paid to your state labor department on a schedule set by your state — usually quarterly or annually. Some states allow monthly payments. Check your state labor department website or your SUTA account notice for the due date.
At the end of the year, you reconcile all quarterly deposits against your actual tax liability, file Form 941 (federal) and your state unemployment tax return, and pay any remaining balance or request a refund if you overpaid.
Common mistakes in employer payroll tax calculation
The most common mistake is using net wages instead of gross wages. Employer payroll taxes are calculated on gross pay — the amount before any deductions. If you accidentally use net pay, your tax liability will be too low, and you will owe penalties and interest.
Another frequent error is forgetting the wage caps. Many employers calculate Social Security tax on all wages instead of stopping at the annual cap, or they calculate FUTA on all wages instead of stopping at $7,000. This overstates your liability and can result in overpayment.
A third mistake is using the wrong SUTA rate or wage base. Rates change annually, and some employers use last year's rate instead of the current year's. Always confirm your rate and wage base at the start of each year with your state labor department.
Finally, some employers confuse employer payroll taxes with employee income tax withholding. These are separate. You withhold income tax from the employee's paycheck and send it to the IRS on their behalf. Employer payroll taxes are your own obligation and come from your business funds, not the employee's paycheck.
Frequently Asked Questions
Do I have to calculate payroll taxes myself, or can payroll software do it?
Payroll software can calculate the amounts for you, but you remain responsible for accuracy and timely payment. Most small businesses use software like QuickBooks Payroll, Gusto, or ADP to automate the math and generate payment instructions. However, you should still review the calculations, especially if you have high-earning employees or if your state SUTA rate changes.
What if an employee works in multiple states?
If an employee works in more than one state during a year, you owe SUTA in each state where they worked. Calculate SUTA separately for each state using that state's rate and wage base. Social Security, Medicare, and FUTA remain the same regardless of which state the work occurred in.
Do I owe employer payroll taxes on 1099 contractors?
No. You owe employer payroll taxes only on employees (W-2 workers). Contractors are self-employed and responsible for their own self-employment taxes. However, you must correctly classify workers as employees or contractors — misclassification can result in significant penalties from the IRS and your state.
What happens if I underpay or miss a payroll tax payment?
The IRS and your state will charge penalties and interest on the unpaid amount. The penalty is typically 2% to 10% of the unpaid tax, plus interest that compounds daily. If the underpayment is large or repeated, you may face criminal charges. If you realize you made an error, contact the IRS or your state immediately to arrange payment and discuss penalty relief options.
Do I owe employer payroll taxes on bonuses or commissions?
Yes. Bonuses, commissions, and any other compensation are treated as gross wages for payroll tax purposes. Calculate Social Security, Medicare, FUTA, and SUTA on the full bonus or commission amount, subject to the same wage caps and bases that apply to regular wages.